Today's Corporate Criminals Are Partners At KPMG

I just love how what is essentially corporate criminal behavior get described as just some kind of small ethical breach. We should all be so lucky. Today's criminals are the partners at the accounting firm at KPMG. Six employees, including five partners and the head of its US audit practice, were fired for basically getting insider information about upcoming audits from KPMG's regulatory overseer and were then able to prepare the firm and its effected clients for those audits.

The Public Accounting Oversight Board (PAOB) is responsible for essentially auditing the auditors, providing spot audits of accounting firms' client audits. A KPMG employee who had joined the firm from the PAOB had a contact within the PAOB who would tip him off to upcoming audits. This employee then tipped off the partners who were responsible for those audits who, presumably, tipped off the clients whose KPMG audit was being audited. Obviously, the opportunity for hiding massive fraud because of these tip-offs is quite high. Significantly, KPMG was the auditor for Wells Fargo which led a massive defrauding of its customers for over a decade. It would be interesting to know, and I know some prosecutor will be asking, whether Wells Fargo was one of the PAOB audits about which KPMG was tipped off.

The KPMG response is just classic corporate PR, saying, "KPMG has zero tolerance for such unethical behavior. Quality and integrity are the cornerstones of all we do and that includes operating with the utmost respect and regard for the regulatory process. KPMG is committed to the highest standards of professionalism, integrity and quality, and we are dedicated to the capital markets we serve. We are taking additional steps to ensure that such a situation should not happen again." Look, these were partners in the firm as well as the head of the US audit practice. These are senior executives at KPMG and they all knew what they were doing highly unethical, if not illegal. And it would be pretty shocking if these were really the only senior executives who "knew" what was going on.

We all know that nothing will happen to KPMG because of this. The firm is one of the Big Four accounting firms, along with Deloitte, PricewaterhouseCoopers, and EY, that dominate the accounting and consulting business for large and multinational firms. It used to be the Big Five and included Arthur Anderson, but that firm was convicted of obstruction of justice in the Enron scandal and, although that conviction was subsequently overturned, it spelled doom for Arthur Andersen as it lost its accounting license and went out of business. However, the lesson from this experience was not a warning shot to other firms engaged in unethical or criminal behavior. Instead, Arthur Andersen became a case study of the danger of criminal convictions of businesses, essentially driving them out of business. So, rather than acting as a constraint on other companies, it allowed big firms, especially those engaged in an oligopoly as so many US businesses are these days, the license to ignore ethical and legal breaches with impunity, knowing the chances of real prosecution and conviction were slim.